––– a weblog focusing on fixed income financial markets, and disconnects within them

Monday, October 12, 2015

EMMA: Time to Grow Up and Be Like Your Big Brother, EDGAR

In 2009, the Municipal Securities Rulemaking Board (MSRB) launched
its Electronic Municipal Market Access
(EMMA) system: the place to go for all things muni. EMMA contains information
about all publicly traded municipal bonds and their issuers including offering documents,
trade activity, ratings, issuer financial statements and event notices (such as
those required when an issuer misses a payment or calls its bonds).

As a frequent user, I’m impressed not only by the wealth of
information available on EMMA, but also with the system’s usability,
reliability and ongoing feature improvements. That said, EMMA has very serious
limitations that are inconsistent with both open government and a liquid municipal
bond market.

In a 2014 open
letter to the MSRB, the Sunlight Foundation pointed out that restrictions
on downloading and the fact that much of EMMA’s data is still in PDF form
greatly limit the system’s transparency. In these respects, it is worth
comparing EMMA with the SEC’s system for collecting and presenting company
financial filings, which is known as EDGAR
(Electronic Data Gathering, Analysis and Retrieval).

Unlike EMMA, EDGAR provides free FTP and RSS access, allowing users to
consume as much content as they wish. EMMA only offers bulk downloads as a high
cost subscription option and specifically forbids using automated techniques to
quickly capture (or “scrape”) site content. It also limits the number of
records that can be returned in “Advanced Searches”, hampering the ability of
market participants and academic researchers to gather and analyze the big data
EMMA contains.

Recent legislation proposed by Congressman Darrell Issa
(R-CA) and co-sponsored by 26 other representatives from both parties would
require MSRB to implement machine-readable disclosures on EMMA. The
Financial Transparency Act of 2015 (HR 2477) mandates the use of standards
based, machine readable disclosures by all financial regulatory agencies and
self-regulatory bodies deriving their powers from federal regulators. This
includes the MSRB whose power to oversee the municipal securities market is
delegated by the Securities and Exchange Commission (SEC).

The SEC also operates EDGAR, which – as we have seen – is
far more open than EMMA. But the SEC has not always been an exemplar of open
data. It took a combination of outside pressure and bureaucratic innovation to
make corporate financial disclosure fully open.

As late as the early-1990s, the primary method of reporting
corporate financial results to the public was through printed annual reports
and paper regulatory filings. Even after the SEC received company filings electronically,
it proved unable to share this machine readable data with the general public.

This situation changed by virtue of work
done by Carl Malamud, a northern California open government advocate. Malamud
obtained SEC disclosures and began posting them on a web site he built with a
National Science Foundation grant. Seeing the success of Malamud’s efforts, the
SEC was shamed into providing this service itself. More recently, Malamud,
through this work at Public.Resource.Org,
has made a similar breakthrough with not-for-profit organization disclosures
submitted to the IRS –Form 990. Malamud’s group began putting these forms on
line at no charge a few years ago, and recently won a court
judgment against the IRS requiring the agency to provide the Form 990
disclosures in machine readable format.

Meanwhile, the SEC has continued to improve EDGAR data. When
it began publishing corporate disclosures in the late 1990s, the data appeared
in SGML
format (SGML is a close relative of HTML). SGML is more easily parsed than
PDFs, so the SEC was way ahead of the MSRB and the IRS from the start. But the
SGML disclosures were not self-describing: the data files were not tagged in
such a way as to provide consistency across files. In the mid-2000s, the SEC
began to embrace eXtensible Business Reporting Language (XBRL) which is
self-describing. Beginning in 2009, the SEC began to mandate that corporate
filers use XBRL – starting with the largest companies and working down to
smaller ones. Now EDGAR users can click an “Interactive Data” button next to
each disclosure to see the XBRL rendered as an interactive web page.

To this author, it seems odd that private companies and now
private, not-for-profit entities have more accessible financial filings than do
state and local governments. Many private organizations affect relatively small
number of stakeholders – perhaps just a few hundred customers, employees and
shareholders. But governments large enough to issue bonds touch the lives of
thousands of taxpayers, service users, beneficiaries and other parties: their
financial affairs are much more a matter of public interest.

EMMA could serve that public interest if its content were
more open – but a number of factors prevent this. For example, MSRB’s board
contains members employed by firms in the municipal bond industry whose revenue
might be reduced by greater industry transparency.

Some of the content on EMMA is proprietary. This restricted
data includes CUSIP numbers that identify each bond, as well as credit ratings.
CUSIPs are owned by the American Bankers Association and administered by McGraw
Hill Financial; they normally cannot be displayed on a web page without a
costly CUSIP license. Although individual bond ratings may be freely
reproduced, rating agencies take measures to prevent the bulk redistribution of
credit ratings, because they sell ratings feeds to large financial industry
customers. Finally, the MSRB also realizes revenue from selling EMMA content in
bulk: users are offered subscriptions to
EMMA data feeds that includes various portions of the primary market and
continuing disclosures available on the system.
If this material could be bulk downloaded at no charge, MSRB would lose
subscription revenue.

While these institutional factors may preclude free bulk
access to EMMA content, it is less clear why MSRB has not mandated filings in
XBRL or some other open, standardized format – rather than PDFs. This idea
appeared on an MSRB road
map in 2012, but there does not seem to be momentum toward implementing it.

That situation would change if the Financial Transparency
Act of 2015 (HR 2477) becomes law. Once PDFs are replaced by structured data,
the cost of creating municipal finance data sets will greatly decline and their
availability will greatly increase. The ultimate results should be better value
for municipal bond investors and substantial cost savings for cities, counties,
school districts and other issuers.

Thanks, Spencer. This is a good point. One challenge that governments have is that they operate on a cash basis but need to report their financial statements on an accrual or modified accrual basis. It would be helpful if governments reported their cash-based results in a consistent format on a quarterly basis.

Thanks for the question about cost. It depends on how the XBRL mandate is implemented by MSRB. I recommend limiting the XBRL disclosure to a relatively small number of key fields as opposed to including everything from the Comprehensive Annual Financial Report. Also, on the technology side, a newer flavor of XBRL - called "Inline XBRL" - is easier to generate and consume.

"Does the MSRB have the authority to require issuers to do this? I thought the Tower Amendment prevented to MSRB from doing something like this?"

BINGO!!

There have been several voluntary initiatives to establish XBRL taxonomies/protocols for CAFRs, but none of them ever seem to make it to the finish line. It is doable, and it could be done in stages, but it is not a simple task and would need to be done in a cooperative manner . . . or by Congressional mandate.

But HR 2477 neither overrides the existing prohibition that prevents the muni regulator from requiring issuers to do anything nor creates a new mandate directly on issuers. As written, HR 2477 directly conflicts with the Tower Amendment and does nothing to resolve that conflict.

So basically we can have all the rules and regulations imaginable to provide timely and full disclosure by municipal issuers but they will have absolutely no effect on the municipalities as they have no jurisdiction over them.

Actually, it is not true that the Tower Amendment contradicts HR 2477. Although the SEC and MSRB may be prevented from directly regulating municipal disclosure filers, they can still regulate the filings themselves. A template for this is the SEC's Municipal Continuing Disclosure Cooperation initiative in which municipal bond underwriters were held accountable for a lack of complete and timely disclosure by their local government clients.

The MSRB could make this happen now and the SEC could then enforce it. But, as I point out in the post, the MSRB has discussed doing it but hasn't taken action. HR 2477 would require MSRB to move forward.

If you wish to discuss further, please email me at marc[at]publicsectorcredit[dot]org. Thanks.